Archive for February, 2007

In a world awash with capital everyone is out hunting for the next Big Business Idea.

The variety of available capital is mind boggling: venture capitalists ready to throw their money at unproven concepts, private equity players ready to inject large dollops to grow businesses, buyout funds ready to recast ageing businesses, funds devoted to make private investments in publicly listed companies, mutual funds to support public offerings and hedge funds ready to gamble on any idea of any scale.

All of this capital is chasing the next Big Business Idea.Where do you go looking for it?

Where do these big ideas spring from? How do you recognize it when you stumble on it?

Public imagination and the work of business journalists make big business ideas seem synonymous with big business personalities. In this recounting, Bill Gates is the titan who thought up the software packages that drive personal computing; Jamshed Tata is the one who conjured up a steel plant in the wilderness of Bihar, India’s software moguls dreamt up their vast outsourcing empires.

Yet, this recounting of business history may just be another version of what modern historians snigger at as the Great Man Theory of history, the attempt to explain history through individuals with great personal charisma and overpowering intellects. Thus the Great Man theory would examine the Second World War by focusing on the big personalities of the conflict: Churchill, Hitler, Mussolini, Franklin Delano Roosevelt and Stalin, and view the events of that war as arising from the actions of these Great Men.

An alternative view is that great new businesses are born when technological discontinuities occur. In this view, entrepreneurs, those Great Men, are mere midwives for the process. For example, the advent of the personal computer would have created the need for software and if not Gates, someone else would have fulfilled that need. Similarly, an expanding Indian railway system in the early 1900’s created such demand for steel rails that if it was not the Tata’s someone else would have fulfilled it. And the move in computing from the mainframe to the PC created such a need for armies of programmers to do the translation of software from the old mode to the new that large IT service companies in some part of the low wage English speaking world would have sprung up anyway.

The Russian economist Kondratieff, writing in the 1920’s, took this kind of thinking to another level. He saw economies as moving in 50-60 year cycles with periods of high growth followed by periods of slower growth with each cycle driven by a bunch of technical innovations.

Thus, wave theorists see five “Kondratieff waves” as having taken place in the modern era. The Industrial Revolution in the late 18th century was the first , followed bythe Age of Steam and Railways (1830’s), the Age of Steel, Electricity and Heavy Engineering (1870’s ),the Age of Oil, the Automobile and Mass Production (1900’s) and finally, the Age of Information and Telecommunications (1970’s). According to this theory, we are currently at the turning-point of the fifth Kondratieff wave.

The story of the Indian pharmaceutical industry spells out the processes by which the forces of a long wave are harnessed to achieve industrial leadership through policy interventions by government. In the 1950’s, when synthetic drugs were all the rage, a German pharmaceutical product, Thalidomide, caused 10,000 children to be born with birth defects. As a strong reaction to this, the US authorities prescribed time consuming and expensive clinical trials as a consumer protection measure. The pharmaceutical industry reacted to this by demanding and receiving a stringent product patent system that would allow them sufficient time to recover their investments in proving the safety of drugs. In India, a group of local pharmaceutical companies lobbied the Indian government to not subscribe to this product patent system- in their view patents should apply only to the process by which a drug is made and not to the product itself. In the two decades of this regime, several, large, Indian pharmaceutical companies got created by reverse engineering western pharmaceutical products and selling them in India.

If entrepreneurs are mere midwives, what make some better midwives than others and what make some business ideas more successful than others?

The auto industry provides some insights into this. The petrol engine-based motor car, a product of the Fourth Kondratieff wave saw, by 1910, several hundred car manufacturers all catering to the wealthy. Using the mass production technique, Henry Ford decreased the price of his cars steadily as they improved in quality. The Ford car in 1904 had a two-cylinder motor, and sold for $1,200. By 1924 it had a more powerful four-cylinder motor, and included a top and windshield yet it sold for only $290. Not surprisingly, more than half of the cars sold in the United States in that period were Ford. The motor car was no longer a plaything of the wealthy.

This might then be the clue to look for. Hunt down the idea that makes lives of ordinary people better and you will find the Next Big Business Idea.

The slightly built young man sitting across the table from me did not look like the typical entrepreneur that one meets in India. He wore thick rimmed spectacles, had close cropped hair and a Ph.D.

“So, what do you think of my business idea?” he asked.

I hesitated to reply. In one respect at least his business idea was possibly a great one- it was something I had never imagined as a possible business. After all, when the Wright brothers managed to stay aloft in their contraption for ninety seconds who would have imagined that it was the start of the gigantic airline industry.

The young man had emailed me out of the blue wanting to bounce off his new business idea.

What intrigued me was that this was the third such request for “advice” that I had received this week. And last week there had been another three.

All were based on a genuine technological innovation. All the ideas served to meet a genuine need or solve a pain point in the lives of millions of people. None of these prospective entrepreneurs were from the traditional business communities. Practically all their fathers were professionals, not businessmen. All were products of elite institutions like the IITs, National Institutes of Technology, Indian Institute of Science or the IIMs.

Yet they all have a common refrain- they are finding it difficult to get venture capitalists interested in their ideas.

In a sense, this is understandable. A venture capitalist fund of $150 -200 million may have a genuine problem in financing a start-up this early and this small. The fund’s overhead cost limits are such that they can afford at best two or three experienced people to find and make investments and work with entrepreneurs. This naturally limits the number of deals they can do to ten or fifteen a year. Thus, they tend to concentrate on deals of larger sizes, say, and a minimum of Rs 10 crores as the starting investment. But what the new breed of talented, young entrepreneurs need is just a fraction of that amount. On the other hand they need dollops of time from their investors to guide them through the crucial initial steps of establishing a business.

The business ideas that are emerging this year are very different from the ones of the Bad Old Eighties.

The ideas of that time mostly involved cornering manufacturing or import license for something that was in short supply. Unfortunately, in this regime there was absolutely no incentive to invest time in technical innovation to, for example, reduce manufacturing costs, because you could get far higher results by influencing the Customs or Excise officer to classify your product under a category that attracted a lower rate of duty.

Highly qualified young graduates of our top institutions had no stomach or perhaps no family connections to play these games, which is why so many of them emigrated to the United States during that time.

Today’s new crop of young technology entrepreneurs sees a ray of hope. Domestic markets getting to be large enough to support innovation, the technical innovation needed is something the feel they can master. But they are getting stuck at the first step- finding the capital for their start-up ventures.

In the United States, that haven of innovation and entrepreneurship, this financing need is filled by a group called “angel investors”. These angel investors tend to be recently retired entrepreneurs and company executives. They have the patience andskills to complement what the young entrepreneur lacks- tips on where to find a good lawyer, when it is worth applying for a patent and when its not, what to look for when youhire people, where to find good talent, tips on how to and how much to delegate. In short, all the tacit knowledge that only a life time of operating experience in excellently managed companies can give you.

The capital such angel investors need to put in is in the Rupees one to two million range. This will help the young entrepreneur take the first step, set up shop and make a working prototype of his new product and find the first few customers. This capital will help him focus on the crucial product development stage and not get distracted by having to earn revenue from unrelated activities merely to meet payroll.

In the United States, in 2005, according to the University of New Hampshire’s Center for Venture Research, the total amount invested by angels exceed the amount invested by venture capital funds.

There are already a number of such angel investors operating in India but the existing numbers are too little for the scale of innovation needed or possible in India today. The Centre for Venture Research estimates that there are about 200,000 angel investors in the United States. By this count, India needs at least 10,000 angel investors.

What will bring India’s seasoned and recently retired company executives into the angel role?What policy formulations will enable this?

I looked around at the young, fashionably dressed women and men in at the hip lounge bar at the W Hotel in Manhattan where I was waiting for Ellen. The men were dressed in dark suits with light blue shirts, the signature dress of the New York financial community. The women wore pant suits signaling their professional status.

Light powdery snow covered the streets outside and there was a slight chill in the air but that did not seem to deter the holiday season shoppers thronging the streets gawking at the lavish displays in store windows.

I had first met Ellen a few years ago when we were looking to rent an apartment in Manhattan. We struck up a friendship and after we moved in, she was helpful in many little ways that eased our stay.

It was Ellen who had introduced us to this bar at the “W” Hotel. She had a great knack for finding chic places that were also great value for money.Ellen had mastered the art of stretching the salary she earned from a middle level information technology job at a Park Avenue publishing company.

“How’s life been?” I asked Ellen as she settled in with her “Cosmo”, the vodka plus cranberry juice drink that everyone in Manhattan was drinking that season.

“I got outsourced”, she said quietly, looking into her drink, her blue eyes starting to mist over.

“How could that happen!” I exclaimed. “You’ve been in your company for so long, you know your job well and your boss is a good friend of yours. I remember meeting him and his wife at your place.”

“All that did not help much. Our publishing company has not been doing too well. Libraries are cutting back their book purchases. Anyway, the upshot of it all is that six months ago, they decided to outsource the whole information technology department to an Indian company. My boss is the only person they have kept back.”

“I am sorry to hear that,” I said. It was my turn to stare into my drink and contemplate the irony of my feelings of sorrow at what had befallen Ellen.

Like other Indians, I have marveled at the turn of events by which India had finally found its giant niche in world commerce: white collar job outsourcing. It started first in information technology and in ever widening circles, is spreading to every conceivable white collar activity. This outpouring of outsourced work to Indiais setting off a chain reaction : providing office space to outsourcing companies is triggering aconstruction boom; the construction boom is driving a boom in the steel, and cement industries. Then, as the young men and women who work in these outsourcing units take out loans and bought apartments and cars and fridges and microwave ovens a boom in the consumer banking industry is being triggered off.

Did economic development have to be such a zero sum game where India’s moment of triumph has to be a moment of sorrow for western white collar employees like Ellen?

“ Don’t worry,” said Ellen as she saw the perplexed look on my face. “Ihave unemployment payments to tide me over. All I need to do is skimp on things like having expensive Cosmos at places like this”

“Don’t you feel bitter? Don’t you feel let-down by your employer after all these years of faithful service? I’ve seen you work late nights with no overtime. Isn’t there somebody you can protest to?”

Ellen shrugged her shoulders. “ This thing happens to everyone here from time to time. By the time my unemployment payments run out, I’ll get another job. Anyway, the Indian girl who took over from me from the outsourcing company is really good. She has a computer science degree, she is in her twenties and knows all the latest technologies. You know I don’t have a computer science degree. I got this job in the boom ten years ago when they were desperate for anyone ready to work in information technology”

Ellen was no economist but I could see that inside her was encoded the mantra that had driven western societies ahead of countries like Indiafrom the time of the Industrial Revolution- the understanding that technological change would cause pain the short run but in the longer run would bring benefits to society as a whole.

Several months later I caught up again with Ellen. Her unemployment pay had run out and she had cut back almost completely from hip places like the one we had met at the last time. She was working at several part-time jobs.

How is it that Western society is willing to pay the short-term price for technological progress and we, in India find it so tough?

Joel Mokyr, the economic historian, has spent a good part of his life looking at what makes some cultures accept technological innovation and what makes others averse to it.He says in his 1990 book, The Lever of Riches, that “the stronger the aversion to the disruption of the existing economic order, the less likely it is that an economy would provide a climate favourable to technological progress.”